Rebalancing ATOL: Consultation on proposals to ensure a fair and proportionate financial protection scheme: Response by Owens Cooper Consulting

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This response to the CAA Consultation CAP1190 is submitted by Owens Cooper Consulting

The Respondent
Owens Cooper Consulting provides comprehensive advice and support to travel, leisure and tourism businesses regarding government and regulatory issues. The principal has more than 25 years experience working with or for large ATOL holders, as well as experience working as a regulator of travel businesses protected under the Package Travel Regulations. This response is not submitted on behalf of any client, but as a general response by the consultancy.

The respondent generally welcomes plans to reduce exposure of the Air Travel Trust to the cost of failure of ATOL holders. As the respondent has primarily worked for the larger contributors to the ATOL scheme, it can see the benefit of the proportion of their contribution reducing. However, it would point out that the income of the Air Travel Trust at present significantly exceeds its expenditure, and changes should not seek to impose a disproportionate burden on ATOL holders.

The Respondent further notes that in the context of its Call for Evidence on the future funding of the ATOL Scheme, the Department for Transport (DfT) has concluded that structural changes to funding should wait the finalisation of the revisions to the Package Travel Directive. It therefore finds the timing of the proposed changes by the CAA a little surprising, particularly as there is no real evidence of any ongoing exposure to the Air Travel Trust of continuation of the status quo.

Furthermore, there is no indication in the consultation document of whether the changes will impact on the licensing costs for all ATOL holders. It is noted that the CAA will have additional regulatory oversight created by the changes, which must add additional cost to the management of the ATOL scheme. It is not clear whether it is anticipated that those costs will be entirely met by the additional fees charged to the ATOL holders who will cease to be SBA’s, or whether the additional costs may need to be met by an increase in the licensing fees charged to all ATOL holders at some point in the future. For the purposes of calculation, for the reasons set out in this response, it is anticipated that it will be unlikely that existing SBAs will choose to join an Accredited Body, and it is more likely that they will be compelled to become full ATOL holders.

Response to specific questions

Question 1: Do you agree that the CAA should end the SBA arrangements, given the reasons stated and the availability of alternatives?

We agree with the CAA analysis which suggests that the exposure of the ATOL scheme to the cost of failure of SBA ATOL holders is disproportionate to the contribution made to the ATOL scheme by those ATOL holders. We question whether the case is necessarily made out in the consultation for the complete abolition of the SBA scheme.

We note that the SBA scheme provides significant regulatory simplification for small businesses, in that the compliance processes for SBA holders are virtually non existent. As a result, the CAA has no opportunity to carry out any form of risk analysis of those businesses – and it is noteworthy that the consultation indicates on page 8 that nearly £1 million of the calls on the scheme resulted from SBAs overtrading. It is therefore possible that some of the issues resulting in the exposure of the scheme from SBAs would be addressed by simply implementing more onerous reporting requirements for SBAs. This would enable the existing scheme to continue, whilst making SBAs pay more detailed attention to their compliance with the ATOL scheme.

We further note that the consultation calculates the cost of compliance with the new regime for SBA’s will amount to approximately £1150 per annum, together with the financial cost of recapitalisation. Aggregated across the 950 SBA’s, this amounts to a compliance cost of around £1.1 million. We note that the net cost of failure of SBA’s in the past 5 years is around £4 million, or around £800,000 per annum. Whilst we acknowledge that part of the purpose of the change is to increase regulatory compliance, we note that this will be coming at a cost to SBA holders, which when the cost of recapitalisation is included is not insubstantial.

We note that the consultation highlights a potential benefit to SBA holders of improved cashflow resulting from paying APC in arrears, rather than upfront. We question whether this improvement (in delaying payment of £1250) really provides any form of offset to the additional costs of £1150, which will have to be paid upfront anyway.

As a result, we question whether alternatives, such as restructuring the SBA scheme, to add more reporting requirements, may achieve the same outputs at significantly less cost to business.

Question 2: Do you agree that the CAA should develop and implement a more sophisticated financial test for ATOL holders licensed for less than £5 million?
The CAA is proposing to a 3 year transition period to introduce the enhanced assessment. Do you agree with this timescale?

We support the proposal for developing and implementing a more sophisticated financial test for ATOL holders licensed for less than £5 million. Whilst we note that the actual costs of failure in this group remain relatively low, we have always been concerned that the Air Travel Trust is exposed to a significant risk of cumulative failures of smaller ATOL holders due to the reduced monitoring of this group. As such, we welcomed the extension of detailed risk assessment from the original top 40 ATOL holders to all those with turnover in excess of £5 million, and we therefore welcome this further extension.

Subject to our general comments made earlier regarding whether it is appropriate to implement such changes in advance of the more general review of ATOL scheme funding suggested in the DfT Call for Evidence, we believe that an implementation period of 3 years seems reasonable.

Question 3: Do you agree that the CAA should make a requirement that accountants reporting on ATOL regulatory information must be Licensed Practitioners?

We understand the benefits of implementing a requirement that reporting accountants have an understanding of the ATOL scheme. Without sight of the proposed licensing arrangements, we cannot comment on the overall appropriateness of the proposal, but in principal, this seems like a sensible step forward. We note that the consultation estimates that the cost of this proposal will amount to £600 per ATOL holder, and we are unclear whether the net effect will be an additional cost for all ATOL holders, as presumably the rules are going to affect equally the reporting accountants for larger ATOL holders. We note that there is no reference to this cost within the consultation.

Question 4: Do you agree that the CAA should introduce an online self-service facility by which ATOL holders will be able to submit financial reporting, as part of a wider move towards online applications?

We welcome the CAA proposal to invest in IT to enable online self service financial reporting to take place. We hope that this will form part of a larger improvement of the IT systems available to the CAA, which will enable the reintroduction of more comprehensive data reporting on the ATOL scheme.

Question 5 for current SBA holders: If these proposals are introduced would you be more likely to remain with the CAA, or transfer to an Accredited Body or an ATOL franchise and, if possible, which one? What do you estimate the costs and benefits would be?

Question 5 for accredited bodies and ATOL franchise holders: What are the costs and the value of benefits for businesses joining your organisations, to potential new members?

As the respondent was previously involved with an Accredited Body, he has some understanding of the working of Accredited body arrangements. We note that the majority of Accredited Bodies are organisations representing the interests of travel agents, whose members primarily hold ATOLs in relation to their dynamic packaging or other small parts of their business where they act as a Principal. In general, the Accredited Bodies are not associations representing tour operators, who will form the majority of SBA holders.

We further note that the CAA have during 2014 made significant changes to the regulatory regime for Accredited Bodies, and in particular, have implemented a requirement for trust accounting in relation to their ATOL business. This change has impacted on the cash flow of both the Accredited Body itself and their members. Furthermore, the Accredited Body model requires the member not to trade in their own right, which would amount to a fundamental change to the trading model of the SBA holders seeking membership of any Accredited Body.

We question whether SBAs will be in a position to understand fully the costs – both direct and indirect of these changes to their business model, to enable them to provide a comprehensive answer to this question.

We further question whether many of the benefits of Accredited Bodies, focussed as they are on travel agents would be relevant or helpful to small tour operators.

As such, we believe that careful consideration would need to be given before incorporating the benefits of Accredited Body membership into any cost benefit analysis of this proposal.

Question 6: Do you agree with the CAA’s current assessment of the costs and benefits of the proposals?
Are there any other costs or benefits not identified that should be considered by the CAA when assessing the impact of the proposals?

We note that the cost and benefit assessment is presently only partial. As such, it is difficult to question the figures contained within the assessment. As highlighted earlier, we question whether any consideration has been given to the additional cost of monitoring as a result of the new arrangements, and as such, we believe that there needs to be specific confirmation as to whether this will impact in any way on ATOL holders more generally.

Furthermore, as indicated above, the proposals for Licensed Practitioners will presumably apply to the advisors for all ATOL holders. As a result, we suspect that all ATOL holders are going to face additional audit costs which are not reflected in the reported costs and benefits.

We further note the proposals on revenue recognition contained in the consultation. Whilst the wording of this proposal seems relatively vague, it suggests that there may be a Standard Term introduced requiring all ATOL holders to recognise revenue at the date of departure, rather than at the point at which the final balance is due, a practice which we would anticipate is commonplace. We would anticipate that a change of this nature could have significant reporting implications for a number of ATOL holders, and note that no costs or other impacts are imputed to this change. Again, we believe that this is a sensible proposal, but believe that there should be some indication of the likely impacts of the proposal.

We hope that this response is helpful, and would be happy to provide any further assistance or information that the CAA may require.